Global Value Fund (HWGAX)

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The performance data quoted represents past performance and does not guarantee future results. Current performance may be lower or higher. Investment return and principal value of the fund will fluctuate, and shares may be worth more or less than their original cost when redeemed. Click quarter-end or month-end to obtain the most recent fund performance.

Manager Commentary
Period ended September 30, 2018

 

MARKET COMMENTARY

In US Dollar terms, the Russell Developed Index returned +4.7% in the third quarter and is now up +5.7% since the beginning of the year. In local currency terms, US markets led, while Europe lagged. The US Dollar strengthened relative to most other major currencies, appreciating by +0.7%, +1.4%, and +2.7% relative to the Euro, Pound, and Yen, respectively.  Stalled Brexit negotiations and the threat of a global trade war have triggered short-lived bouts of equity market volatility across the globe, but positive economic data and strong corporate earnings growth have offset those concerns.  Despite sell side analysts having revised estimates upward rather persistently, nearly two-thirds of Russell Developed Index companies beat consensus earnings estimates in the most recent quarter.  The median positive surprise was 12% above consensus estimates.   

Global growth stocks outperformed global value stocks in the quarter, extending growth’s considerable lead in recent years.  Investors’ preference for growth stocks was evident across regions but has been most pronounced in the US.  Three years ago, the forward P/E for the Russell 1000 Growth Index was 18.6x compared to 15.3x for the Russell 1000 Value Index, for a difference of 3.3x (“growth premium”).  Today, the forward P/E ratio for the Russell 1000 Growth is 22.9x while the Russell 1000 Value continues to trade at 15.3x.  The current growth premium in the US, therefore, is 7.6x (22.9x – 15.3x), which is nearly double the long term average of 4.0x.  Earnings growth between the two indices has been comparable, thus the primary cause of the performance difference has been the repricing of growth stocks, i.e. multiple expansion.  The same phenomenon has occurred in Europe and the Pacific, albeit to a smaller magnitude—value and growth performance disparities have been about half that experienced in the US.  We do not believe that this valuation gap can widen indefinitely, and consequently we are optimistic about the prospects of value relative to growth as we look at global equity markets going forward.  

We remain overweight financials, industrials, and energy compared to the Russell Developed Index.  We are about equal weight in the technology, though we have taken considerable capital out of the sector since the beginning of the year.  The sector overall, and our portfolio holdings in particular, have outperformed and so we have shifted capital to more compelling valuation opportunities.  We have added capital to financials and consumer staples as the sectors have underperformed.

The portfolio’s valuation discount relative to the market has continued to widen, which gets us excited about the portfolio going forward.  The portfolio trades at 7.7x normal earnings – less than 50% of the Russell Developed Index at 16.4x.  The portfolio’s price-to-book ratio is 1.2x compared to 2.3x for the Russell Developed Index.   

ATTRIBUTION: 3Q 2018

The Hotchkis & Wiley Global Value Fund underperformed the Russell Developed Index in the third quarter of 2018.  The growth-led market was not a conducive environment for our value-focused approach.  Stock selection in consumer discretionary and industrials, along with the underweight exposure to healthcare detracted from relative performance in the quarter.  Positive stock selection in technology and real estate helped performance, along with the underweight exposure to materials.  The largest detractors to relative performance in the period were Embraer, Vodafone, General Motors, Ophir Energy, and Barclays; the largest positive contributors were WestJet Airlines, Discovery, Oracle, Corning, and Popular.      

LARGEST NEW PURCHASES: 3Q 2018

BNP Paribas is a French universal bank with global retail banking and diversified financial services operations. The Company is well-positioned in its “home” Benelux retail banking and insurance markets, and has profitable and growing businesses outside of the region. BNP’s Corporate and Investment bank is a leader in European fixed income and also has a strong global equity derivatives franchise. European bank valuations have been negatively impacted by concerns regarding Brexit, Italy, Turkey and other emerging markets. BNP is no exception. We think that at 0.8x tangible book and 8.0x price-to-normal earnings BNP presents a very attractive investment opportunity.

Hitachi Ltd. is a Japanese multi-industrial with improving corporate governance and significant excess capital trading at a low multiple of current earnings. The Company has been transforming itself by reducing the number of listed subsidiaries, disposing underperforming/secularly challenged businesses, improving the cost structure of its businesses and reinvesting in higher returning businesses.

Mutual fund investing involves risk. Principal loss is possible. The Fund may invest in foreign securities which involve greater volatility and political, economic and currency risks and differences in accounting methods. These risks are greater for emerging markets. The Fund may invest in American Depository Receipts (“ADRs”) and Global Depository Receipts (“GDRs”) which may be subject to some of the same risks as direct investment in foreign companies.

Fund holdings and/or sector allocations are subject to change and are not buy/sell recommendations. Current and future portfolio holdings are subject to risk. Certain information presented based on proprietary or third-party estimates are subject to change and cannot be guaranteed. Portfolio managers’ opinions and data included in this commentary are as of 9/30/18 and are subject to change without notice.  Any forecasts made cannot be guaranteed.  Information obtained from independent sources is considered reliable, but H&W cannot guarantee its accuracy or completeness. Specific securities identified are the largest contributors (or detractors) on a relative basis to the Russell Developed Index. Securities’ absolute performance may reflect different results. The “Largest New Purchases” section includes the three largest new security positions during the quarter based on the security’s quarter-end weight adjusted for its relative return contribution; does not include any security received as a result of a corporate action; if fewer than three new security positions at quarter-end, all new security positions are included. The Fund may not continue to hold the securities mentioned and the Advisor has no obligation to disclose purchases or sales of these securities. Attribution is an analysis of the portfolio's return relative to a selected benchmark, is calculated using daily holding information and does not reflect the payment of transaction costs, fees and expenses of the Fund. Past performance is no guarantee of future results. Diversification does not assure a profit nor protect against loss in a declining market.

Investing in value stocks presents the risk that value stocks may fall out of favor with investors and underperform other asset types during a given period. Equities, bonds, and other asset classes have different risk profiles, which should be considered when investing. All investments contain risk and may lose value. 

 

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